Suppose the Fed decides to buy bonds and the New Hampshire Colonial Bank
decides to sell $10 million worth of bonds. What will New Hampshire Colonial
Bank most likely be able to do?*
A) Borrow more reserves at the "discount window"

B) Make new loans totaling about $10 million

C) Borrow more reserves from other banks

D) Reduce its outstanding loans by $10 million

If both the Fed and New Hampshire Colonial Bank engaged in such an action, the bank would be able to B) Make new loans totaling about $10 million.

When the Fed buys bonds they end up pumping money into the economy because they would be using cash to buy those bonds. The banks that sell these bonds will then receive that money.

With this money they will:

Create loans
Fund people and businesses through these loans thereby boosting the economy.

The loans created with be equal to the amount received from the Fed so we can conclude that the bank will make $10 million worth of loans.

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